Inside the Market’s roundup of some of today’s key analyst actions
National Bank Financial analyst Shane Nagle thinks demand concerns and a near-term supply growth are overshadowing “compelling” valuations and “supportive” long-term fundamentals for TSX-listed copper equities.
“Copper prices are off more than 13 per cent from its peak of US$4.94 per pound on March 4th,” he said in a note released Wednesday. “Russia’s ongoing invasion of Ukraine continues to impact oil prices and supply of key reagents while China’s zero-COVID policy continues to put pressure on end-use demand as varying degrees of lockdown throughout the region continue to impact flow of workforce, raw materials and finished goods throughout the country. These broader supply chain issues will allow inflationary pressures to persist despite more aggressive monetary tightening by Governments worldwide.”
“Much of copper’s run throughout 2021 had been driven by an influx of speculative investor interest influenced by the re-opening of the global economy, accommodative Government policies/stimulus spending and ample global liquidity. Recent ‘risk-off’ sentiment has resulted in net short positions not experienced since the beginning of the COVID-19 pandemic. Add to that, copper supply disruptions year-to-date in line with expectations, and ramp-up of several key projects driving an expected market surplus in 2023/2024.”
Despite this “anticipated” volatility, Mr. Nagle remains bullish on copper, seeing “increased momentum for copper-intensive green energy initiatives and a lack of advanced-stage projects in the pipeline to meet rising long-term demand.”
He now sees equities in the sector “attractively priced” following recent struggles.
“Copper equities in our coverage are down an average of 24 per cent over the past month and while macro headlines are expected to dictate near-term performance, commodity prices continue to support favorable valuations and strong cash flow,” the analyst said. “P/NAV and EV/CF valuations are currently below historical averages and equities are pricing in US$3.08 per pound copper (based on 1.0 times NAV), one of the wider discounts to spot prices in recent years at 28 per cent.”
Mr. Nagle named three top producer picks:
* Teck Resources Ltd. (TECK.B-T) with an “outperform” rating and $65 target. The average on the Street is $60.74.
“Elevated coal prices continue to drive strong FCF margins while completion of QB2 in H2/22 will drive growth of the copper business, leading to further increases in shareholder returns,” he said. “Elevated oil prices have driven a significant inflection point in the value of Fort Hills and several advancements of non-core projects like San Nicolas, Masaba and Zafranel may lead to a number of non-core assets being monetized.”
* First Quantum Minerals Ltd. (FM-T) with an “outperform” rating and $46 target. The average is $42.99.
“Remains a ‘go-to’ copper producer given its highquality asset base, low AISC [all-in sustaining costs] and one of the most robust project pipelines (including Cobre-Panama, Enterprise, Kansanshi S3 expansion and Taca Taca),” he said. “A recent long-term fiscal agreement in Zambia and agreement in principle on royalty/tax treatment in Panama provide more confidence in near-term organic growth projections.”
* Hudbay Minerals Inc. (HBM-T) with an “outperform” rating an $11.50 target. The average is $12.78.
“2022 represents an operational inflection point with Pampacancha grades picking up in Q4/22 and New Britannia production ramping up throughout the year,” he said. “A technical report on Copper World in Q3/22 is expected to provide more clarity on the private land-only development alternative in Arizona which currently represents a free-option within the portfolio. An update in early-2023 on processing 777 tailings will also provide an opportunity to extend the operations life and reduce long-term reclamation expenditures.”
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Wells Fargo analyst Edward Kelly initiated coverage of the North American convenience store subsector with “a cautiously optimistic view” on Wednesday.
“The industry is highly fragmented and competitive, but we see potential upside from ongoing consolidation, are optimistic on the M&A outlook, and favor acquisitive players,” he said. “The core fuel business looks to be in the early stages of a slow, structural decline, but we see plenty of growth potential for those with sophistication and scale. We are much more bullish on inside sales, which have a history of steady growth and numerous avenues for further advancement. The nearer-term outlook is more complex. Record fuel margins during the pandemic boosted earnings, but the path from here is uncertain, as reopening takes hold and margins remain a question mark. We favor those with less fuel exposure and stronger inside businesses.”
Mr. Kelly said he’s bullish on Montreal-based Alimentation Couche-Tard Inc. (ATD-T), pointing to its “strong inside business (and associated reopening benefit), positioning to capitalize on M&A, insulation from longer-dated headwinds, and attractive valuation.”
He gave it an “overweight” recommendation, saying there’s “no substitute for scale and experience” and believing its the strongest on both measures in his coverage universe.
“The company is the No.2 player in the U.S. with more than 7k stores (3 times its closest peer) and a large, global footprint,” he said. “Growth has focused on M&A historically (70 per cent of growth), which admittedly comes with risks, but performance has been impressive. A ten-year EBITDA CAGR [compound annual growth rate] of 21 per cent through F21 (MUSA and CASY are both closer to 10 per cent) speaks for itself, in our view.
“The company is also an industry leader with M&A and its experience should continue to prove valuable against the current backdrop. Any developments here could represent a catalyst, especially as ATD maintains record low levels of leverage and cash remains near highs. The international business admittedly adds risk as well, but we believe it also provides differentiation versus peers. Incremental scale matters abroad too, especially as strategic efforts can be leveraged globally. The broader footprint also provides visibility on trends as they emerge (such as accelerated EV adoption in parts of Europe), and licensing and franchising arrangements facilitate flexible expansion as ATD looks to test new markets.”
With Couche-Tard “rapidly” approaching its 2023 EBITDA target of US$6.3-billion, Mr. Kelly thinks there’s further potential “strategically” to exceed the organic portion of that result, noting: “Any M&A would represent upside, and repo looks poised to accelerate even if a material target does not emerge.”
Calling it “a blue chip player with [a] strong growth track record,” he set a target of $65 per share. The current average on the Street is $61.97.
“We lastly find the valuation to be reasonable at current levels and believe it leaves plenty of room for upside potential,” said Mr. Kelly.
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Canaccord Genuity analyst Dalton Baretto sees Capstone Copper Corp.’s (CS-T) first-quarter results as “fairly neutral and somewhat irrelevant to the investment thesis at this time.”
“A significant portion of the release was dedicated to the near-term impact of inflation on inputs (particularly diesel and sulphuric acid) as well as context on optimization/growth efforts at each of the operations,” he said.
In a research report released Wednesday following recent meetings with the Vancouver-based miner’s management and a tour of its Pinto Valley mine in Arizona, Mr. Baretto reaffirmed Capstone as one of his top two picks in the base metals space, along with Ivanhoe Mines Ltd. (IVN-T), based on its “growth trajectory, pending catalysts, leverage to copper, and attractive valuation.”
However, citing higher near-term costs and capex, Mr. Baretto reduced his target for its shares by $1 to $9, keeping a “buy” rating. The average on the Street is $8.39.
“Our BUY rating is based on the significant implied upside to our target and the numerous near-term potential catalysts,” he added.
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Citing “deteriorating fundamentals and a highly levered capital structure cast doubt on the future viability of the company,” Echelon Capital Markets analyst Amr Ezzat moved his recommendation for VOTI Detection Inc. (VOTI-X) to “under review” from “speculative buy” previously.
On Tuesday, shares of the Montreal-based tech company, which is focused on X-ray security systems, plummeted 43.5 per cent after it announced it now expects second-quarter revenue in a range of between $4.575-million and $4.7-million, down from its earlier $6-million forecast, with gross margins of 25.5 per cent to 27 per cent.
Pointing to “continued uncertainty” due to “the current softness in the market coupled with a significant increase in supply and shipping costs,” it also withdrew its 2022 fiscal year and questioned its ability to generate sufficient cash flows to pay expenses and settle debt obligations.
VOTI plans to provide further details with its second-quarter results on May 31.
“We look to review the Company’s prospects and investment merits with the release of additional information,” said Mr. Ezzat.
He placed his target for its shares under view after previously setting a 35-cent target. The average on the Street is 40 cents.
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National Bank Financial analyst John Shao sees an “attractive risk-to-reward profile” for Converge Technology Solutions Corp. (CTS-T) following an investor meeting with CEO Shane Maine.
“In our view, while [Tuesday’s] meetings covered several of the important topics such as the supply chain, inflation, capital allocation strategy and managed services initiatives, they also reinforced our view that it’s the combination of M&A and organic growth that makes this name appealing,” he said in a note. “As for the rest of the year, we think the Company is on track to achieve or even exceed its previous goals in terms of capital deployment and ARR addition while maintaining a healthy organic growth of 10 per cent.
“Bottom line, what we heard during today’s meetings is consistent with our thesis laid out in our initiation of coverage report Unlocking Value where we believe the opportunity for this name comes not only from the disciplined M&A strategy, but also from the scaling organic growth as the Company integrates its acquired businesses.”
Pointing to a recent sector-wide pullback, Mr. Shao now sees the a valuation discount for “a name with a solid balance sheet and multiple levers to pull to accelerate the growth,” reiterating his “outperform” rating and $14 target. The average target on the Street is $12.75.
“Based on our DCF model, we’re of the view that the current stock price has not priced in a full M&A run-rate as well as the contribution from future organic growth, which is why we maintain our Outperform rating on this name,” he added.
Elsewhere, Scotia Capital’s Divya Goyal maintained a “sector outperform” rating and $14 target after meetings with Mr. Maine.
“We believe CTS has a well-established global business model aligned with the ever-increasing demand for digital transformation solutions resulting in a robust business pipeline and solid free cash flows while being backed by a strong leadership team,” she said. In our opinion, CTS’s stock is undervalued.”
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Canaccord Genuity analyst Derek Dley expects a “challenging” supply chain backdrop to weigh on the first-quarter 2023 financial results for BRP Inc. (DOO-T).
“While demand for its products continues to stay healthy with the company wrapping up another strong snowmobile season and inventory levels continuing to remain lean, BRP expects Q1/F23 to remain relatively muted from a top-line and EBITDA growth standpoint, owing to negative impacts from an unfavourable product mix shift with the company deferring shipment of higher-end SSVs and PWCs to Q2 and ongoing supply chain and inflation associated headwinds,” he said.
“That said, the company expects to return to EBITDA growth from Q2/F23 onward as it expects supply chain challenges to begin to subside from then on and expects the final three quarters of the year to drive the bulk of the revenue and EBITDA growth implied in its guidance. Accordingly, we are forecasting roughly flat growth across all segments, except for Marine, where we are forecasting a modest growth of 1.0 per cent year-over-year in sales.”
Ahead of the June 3 premarket release, Mr. Dley is forecasting revenue of $1.8-billion, flat year-over-year and narrow lower than the consensus projection of $1.9-million. His adjusted EBITDA estimate of $260-million exceeds the Street’s $232-million prediction but below last year’s $379-million result.
“On the margin front, we are expecting ongoing headwinds stemming from supply chain issues and inflationary pressures, along with the Omicron wave earlier during the year, to weigh on the gross margin profile for the quarter,” he said. “Accordingly, we are forecasting gross margins of 26.0 per cent, down 400 basis points from Q1/F22. We see a similar impact on other operating expenses as well, owing to wage and labour inflationary pressures and continued growth in the company’s manufacturing footprint. Together, this drives our EBITDA forecast of $260 million, which represents an EBITDA margin of 14.3 per cent, down from 21.0 per cent recorded in Q1/F22.”
Mr. Dley reaffirmed his “buy” rating and $136 target for BRP shares. The current average is $136.25.
“In our view, BRP is well positioned to capture additional market share in a growing powersports market as it continues to introduce new products and extends its reach into complementary product lines,” he said.
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NowVertical Group Inc. (NOW-X) is a “compelling investment opportunity,” according to Echelon Capital Markets analyst Rob Goff, seeing an organic growth rate of more than 20 per cent this year.
In a research report released Wednesday, he initiated coverage of the Toronto-based data analytics software and services firm with a “speculative buy” recommendation.
“Beyond organic growth, we look for the successful completion of strategic, accretive acquisitions from its pipeline to support a target run rate of $100-million exiting 2023,” said Mr. Goff. “Cross-selling represents upside to our baseline 20-per-cent organic growth while platform efficiencies support margin expansion to leverage revenue growth. At scale, NOW targets 60-per-cent-plus gross profit margins and EBITDA margins of 15-20 per cent.
“With demonstrated organic and inorganic growth, advancing scale and profitability, we look for an aggressive revaluation of the shares. We believe the prospective returns linked to a scale-driven revaluation of its shares represent a strong return profile against the associated execution risks where NOW’s track record and synergies warrant confidence that it will be successful.”
Mr. Goff, currently the lone analyst on the Street covering the stock, set a target of $1.60, representing 248-per-cent upside.
“Our bullish thesis looks for NOW to rapidly emerge as a mid-market focused, fusion analytics firm leveraging its purpose-built solutions for high-value, data-driven decision-making with a focus on strategic verticals where it can build vertical intelligence (‘VI’) and refined analytics capabilities,” he said. “Larger fusion analytics firms Palantir (PLTR-N) and C3.ai (AI-N) are ambassadors for fusion capabilities, while the endorsement of marquee clients such as General Motors (GM-N), the US Department of Defense (DoD), and Netflix (NFLX-Q) bring NOW immediate credibility while opening doors in large verticals.”
“We look for NOW shares to respond positively to further accretive acquisitions, marquee client wins, and with evidence that the Company is progressing towards an exit revenue run-rate of $40-million-plus. We would expect its shares to respond favourably to NOW securing additional debt and equity capital that would be seen to support its ability to execute further roll-up acquisitions as part of our bullish view toward it achieving scale efficiencies and a positive revaluation. We believe raising debt would be welcomed as a lower cost of non-dilutive capital where we feel there is currently an overhang where investors aware of the depth of NOW’s pipeline look for more aggressive equity raises than we envision.”
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In other analyst actions:
* In a research report titled America, Where Residential Dreams Are Made, CIBC World Markets analyst Dean Wilkinson initiated coverage of Dream Residential Real Estate Investment Trust (DRR.U-T), which started trading on May 6 following its US$125-million initial public offering, with an “outperformer” rating and US$15 target.
“DRR’s core markets provide investors with exposure to a robust economic environment and favorable rental fundamentals, with above-average near-term growth potential in the form of rental lifts on both turned suites and renewals as they, unlike many of their Canadian domestic peers, have no rental controls in place in their key markets,” he said. “The vertically integrated management team of Dream and Pauls brings years of experience, and has a successful track record of delivering above-average returns within this asset class and the U.S. market space. G
“iven the current economic (interest rate) environment, we are applying a cap rate of 5.25 per cent to the forecasted NOI, a rate that is slightly under the implied cap rate of the independently appraised value of the assets, and have a price target of $15.00, assuming the units trade in parity with our estimated NAV.”
* JP Morgan’s Jeremy Tonet raised his Enbridge Inc. (ENB-T, “overweight”) target to $62 from $61 and Pembina Pipeline Corp. (PPL-T, “neutral”) to $53 from $51, while he cut his TC Energy Corp. (TRP-T, “neutral”) target by $1 to $73. The average targets on the Street are $59.95, $52.93 and $72.30, respectively.
* TD Securities’ Tim James raised his GFL Environmental Inc. (GFL-T) target to $53, exceeding the $47.67 average, from $51, maintaining a “buy” recommendation following its Investor Day event.
“We believe that the current market environment of uncertainty around the impact of inflation on company expenses and consumer spending behaviour favours the relatively insulated business of GFL,” said Mr. James. “We believe that the ability of the organic business to deleverage through 2025 should be reassuring to investors, though we also believe that investors should remain patient should management find opportunities to deploy capital into value enhancing initiatives that slow the rate of deleveraging. GFL’s debt maturity profile and exposure to fixed rate debt provides additional balance sheet security, in our view.”